Buyer’s Guide to:
Fixed Deferred
Annuities
National Association of Insurance Commissioners
2301 McGee St
Suite 800
Kansas City, MO 64108-2604
(816) 842-3600
© 1999, 2007 National Association of Insurance
Commissioners
Prepared by the
NAIC
National Association of Insurance Commissioners
The National Association of Insurance Commissioners is an association of state insurance
regulatory officials. This association helps the various insurance departments to coordinate
insurance laws for the benefit of all consumers.
This guide does not endorse any company or policy.
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Buyer’s Guide to Fixed Deferred Annuities
It is Important
What is an Annuity?
An annuity is a contract in which an insurance company makes a series
of income payments at regular intervals in return for a premium or
premiums you have paid. Annuities are most often bought for future
retirement income. Only an annuity can pay an income that can be
guaranteed to last as long as you live. An annuity is neither a life
insurance nor a health insurance policy. It’s not a savings account or a
savings certificate. You shouldn’t buy an annuity to reach short-term
financial goals.
Your value in an annuity contract is the premiums you’ve paid, less any
applicable charges, plus interest credited. The insurance company uses
the value to figure the amount of most of the benefits that you can
choose to receive from an annuity contract. This guide explains how
interest is credited as well as some typical charges and benefits of annuity contracts.
A deferred annuity has two parts or periods. During the accumulation period, the money you
put into the annuity, less any applicable charges, earns interest. The earnings grow tax-deferred
as long as you leave them in the annuity. During the second period, called the payout period,
the company pays income to you or to someone you choose.
What Are the Different Kinds of Annuities?
This guide explains major differences in different kinds of annuities to help you understand how
each might meet your needs. But look at the specific terms of an individual contract you’re
considering and the disclosure document you receive. If your annuity is being used to fund or
provide benefits under a pension plan, the benefits you get will depend on the terms of the plan.
Contact your pension plan administrator for information.
This Buyer’s Guide will focus on individual fixed deferred annuities.
Single Premium or Multiple Premium
You pay the insurance company only one payment for a single premium annuity. You make a
series of payments for a multiple premium annuity. There are two kinds of multiple premium
annuities. One kind is a flexible premium contract. Within set limits, you pay as much premium
© 1999, 2007 National Association of Insurance Commissioners
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What is an Annuity?
that you understand the differences among various annuities so you can choose the kind that
best fits your needs. This guide focuses on fixed deferred annuity contracts. There is, however,
a brief description of variable annuities. If you’re thinking of buying an equity-indexed annuity,
an appendix to this guide will give you specific information. This Guide isn’t meant to offer legal,
financial or tax advice. You may want to consult independent advisors. At the end of this Guide
are questions you should ask your agent or the company. Make sure you’re satisfied with the
answers before you buy.
Buyer’s Guide to Fixed Deferred Annuities
as you want, whenever you want. In the other kind, a scheduled premium annuity, the contract
spells out your payments and how often you’ll make them.
Fixed Deferred Annuities
Immediate or Deferred
With an immediate annuity, income payments start no later than one year after you pay the
premium. You usually pay for an immediate annuity with one payment. The income payments
from a deferred annuity often start many years later. Deferred annuities have an accumulation
period, which is the time between when you start paying premiums and when income
payments start.
Fixed or Variable
• Fixed
During the accumulation period of a fixed deferred annuity, your money (less any applicable
charges) earns interest at rates set by the insurance company or in a way spelled out in the
annuity contract. The company guarantees that it will pay no less than a minimum rate of
interest. During the payout period, the amount of each income payment to you is generally
set when the payments start and will not change.
• Variable
During the accumulation period of a variable annuity, the insurance company puts your
premiums (less any applicable charges) into a separate account. You decide how the
company will invest those premiums, depending on how much risk you want to take. You may
put your premium into a stock, bond or other account, with no guarantees, or into a fixed
account, with a minimum guaranteed interest. During the payout period of a variable annuity,
the amount of each income payment to you may be fixed (set at the beginning) or variable
(changing with the value of the investments in the separate account).
How Are the Interest Rates Set for My Fixed Deferred
Annuity?
During the accumulation period, your money (less any applicable charges) earns interest at
rates that change from time to time. Usually, what these rates will be is entirely up to the
insurance company.
Current Interest Rate
The current rate is the rate the company decides to credit to your contract at a particular
time. The company will guarantee it will not change for some time period.
• The initial rate is an interest rate the insurance company may credit for a set period of time
after you first buy your annuity. The initial rate in some contracts may be higher than it
will be later. This is often called a bonus rate.
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© 1999, 2007 National Association of Insurance Commissioners
Buyer’s Guide to Fixed Deferred Annuities
• The renewal rate is the rate credited by the company after the end of the set time period.
The contract tells how the company will set the renewal rate, which may be tied to an
external reference or index.
Minimum Guaranteed Rate
Multiple Interest Rates
Some annuity contracts apply different interest rates to each premium you pay or to
premiums you pay during different time periods. Other annuity contracts may have two or
more accumulated values that fund different benefit options. These accumulated values may
use different interest rates. You get only one of the accumulated values depending on which
benefit you choose.
What Charges May Be Subtracted from My Fixed Deferred
Annuity?
Most annuities have charges related to the cost of
selling or servicing it. These charges may be
subtracted directly from the contract value. Ask your
agent or the company to describe the charges that
apply to your annuity. Some examples of charges, fees
and taxes are:
Surrender or Withdrawal Charges
If you need access to your money, you may be able to take all or part of the value out of your
annuity at any time during the accumulation period. If you take out part of the value, you may
pay a withdrawal charge. If you take out all of the value and surrender, or terminate, the
annuity, you may pay a surrender charge. In either case, the company may figure the charge
as a percentage of the value of the contract, of the premiums you’ve paid or of the amount
you’re withdrawing. The company may reduce or even eliminate the surrender charge after
you’ve had the contract for a stated number of years. A company may waive the surrender
charge when it pays a death benefit.
Some annuities have stated terms. When the term is up, the contract may automatically
expire or renew. You’re usually given a short period of time, called a window, to decide if you
want to renew or surrender the annuity. If you surrender during the window, you won’t have
to pay surrender charges. If you renew, the surrender or withdrawal charges may start over.
In some annuities, there is no charge if you surrender your contract when the company’s
current interest rate falls below a certain level. This may be called a bail-out option.
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Fixed Deferred Annuities
The minimum guaranteed interest rate is the lowest rate your annuity will earn. This rate is
stated in the contract.
Buyer’s Guide to Fixed Deferred Annuities
In a multiple-premium annuity, the surrender charge may apply to each premium paid for a
certain period of time. This may be called a rolling surrender or withdrawal charge.
Fixed Deferred Annuities
Some annuity contracts have a market value adjustment feature. If interest rates are different
when you surrender your annuity than when you bought it, a market value adjustment may
make the cash surrender value higher or lower. Since you and the insurance company share
this risk, an annuity with an MVA feature may credit a higher rate than an annuity without the
feature.
Be sure to read the Tax Treatment section and ask your tax advisor for information about
possible tax penalties on withdrawals.
Free Withdrawal
Your annuity may have a limited free withdrawal feature. That lets you make one or more
withdrawals without a charge. The size of the free withdrawal is often limited to a set
percentage of your contract value. If you make a larger withdrawal, you may pay withdrawal
charges. You may lose any interest above the minimum guaranteed rate on the amount
withdrawn. Some annuities waive withdrawal charges in certain situations, such as death,
confinement in a nursing home or terminal illness.
Contract Fee
A contract fee is a flat dollar amount charged either once or annually.
Transaction Fee
A transaction fee is a charge per premium payment or other transaction.
Percentage of Premium Charge
A percentage of premium charge is a charge deducted from each premium paid. The
percentage may be lower after the contract has been in force for a certain number of years or
after total premiums paid have reached a certain amount.
Premium Tax
Some states charge a tax on annuities. The insurance company pays this tax to the state. The
company may subtract the amount of the tax when you pay your premium, when you
withdraw your contract value, when you start to receive income payments or when it pays a
death benefit to your beneficiary.
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© 1999, 2007 National Association of Insurance Commissioners
Buyer’s Guide to Fixed Deferred Annuities
What Are Some Fixed Deferred Annuity Contract
Benefits?
One of the most important benefits of deferred annuities is your ability to use the value built
up during the accumulation period to give you a lump sum payment or to make income
payments during the payout period. Income payments are usually made monthly but you may
choose to receive them less often. The size of income payments is based on the accumulated
value in your annuity and the annuity’s benefit rate in effect when income payments start. The
benefit rate usually depends on your age and sex, and the annuity payment option you
choose. For example, you might choose payments that continue as long as you live, as long
as your spouse lives or for a set number of years.
There is a table of guaranteed benefit rates in each annuity contract. Most companies have
current benefit rates as well. The company can change the current rates at any time, but the
current rates can never be less than the guaranteed benefit rates. When income payments
start, the insurance company generally uses the benefit rate in effect at the time to figure the
amount of your income payment.
Companies may offer various income payment options. You (the owner) or another person
that you name may choose the option. The options are described here as if the payments are
made to you.
Life Only
The company pays income for your lifetime. It doesn’t make any payments to anyone after
you die. This payment option usually pays the highest income possible. You might choose it
if you have no dependents, if you have taken care of them through other means or if the
dependents have enough income of their own.
Life Annuity with Period Certain
The company pays income for as long as you live and guarantees to make payments for a set
number of years even if you die. This period certain is usually 10 or 20 years. If you live longer
than the period certain, you’ll continue to receive payments until you die. If you die during
the period certain, your beneficiary gets regular payments for the rest of that period. If you
die after the period certain, your beneficiary doesn’t receive any payments from your annuity.
Because the "period certain" is an added benefit, each income payment will be smaller than in
a life-only option.
Joint and Survivor
The company pays income as long as either you or your beneficiary lives. You may choose to
decrease the amount of the payments after the first death. You may also be able to choose to
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Fixed Deferred Annuities
Annuity Income Payments
Buyer’s Guide to Fixed Deferred Annuities
have payments continue for a set length of time. Because the survivor feature is an added
benefit, each income payment is smaller than in a life-only option.
Death Benefit
Fixed Deferred Annuities
In some annuity contracts, the company may pay a death benefit to your beneficiary if you die
before the income payments start. The most common death benefit is the contract value or
the premiums paid, whichever is more.
Can My Annuity’s Value Be Different Depending on My
Choice of Benefit?
While all deferred annuities offer a choice of benefits, some use different accumulated values
to pay different benefits. For example, an annuity may use one value if annuity payments are
for retirement benefits and a different value if the annuity is surrendered. As another example,
an annuity may use one value for long-term care benefits and a different value if the annuity is
surrendered. You can’t receive more than one benefit at the same time.
What About the Tax Treatment of Annuities?
Below is a general discussion about taxes and annuities.
You should consult a professional tax advisor to discuss
your individual tax situation.
Under current federal law, annuities receive special tax
treatment. Income tax on annuities is deferred, which
means you aren’t taxed on the interest your money earns
while it stays in the annuity. Tax-deferred accumulation
isn’t the same as tax-free accumulation. An advantage of
tax deferral is that the tax bracket you’re in when you
receive annuity income payments may be lower than the
one you’re in during the accumulation period. You’ll also be earning interest on the amount you
would have paid in taxes during the accumulation period. Most states’ tax laws on annuities
follow the federal law.
Part of the payments you receive from annuity will be considered as a return of the premium
you’ve paid. You won’t have to pay taxes on that part. Another part of the payments is
considered interest you’ve earned. You must pay taxes on the part that is considered interest
when you withdraw the money. You may also have to pay a 10% tax penalty if you withdraw the
accumulation before age 59½. The Internal Revenue Code also has rules about distributions
after the death of a contract holder.
Annuities used to fund certain employee pension benefit plans (those under Internal Revenue
Code Sections 401(a), 401(k), 403(b), 457 or 414) defer taxes on plan contributions as well as on
interest or investment income. Within the limits set by the law, you can use pretax dollars to
make payments to the annuity. When you take money out, it will be taxed.
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© 1999, 2007 National Association of Insurance Commissioners
Buyer’s Guide to Fixed Deferred Annuities
You can also use annuities to fund traditional and Roth IRAs under Internal Revenue Code
Section 408. If you buy an annuity to fund an IRA, you’ll receive a disclosure statement
describing the tax treatment.
Many states have laws which give you a set number of days to look at the annuity contract after
you buy it. If you decide during that time that you don’t want the annuity, you can return the
contract and get all your money back. This is often referred to as a free look or right to return
period. The free look period should be prominently stated in your contract. Be sure to read
your contract carefully during the free look period.
How Do I Know if a Fixed Deferred Annuity Is Right for
Me?
The questions listed below may help you decide which type of annuity, if any, meets your
retirement planning and financial needs. You should think about what your goals are for the
money you may put into the annuity. You need to think about how much risk you’re willing to
take with the money. Ask yourself:
• How much retirement income will I need in addition to what I will get from Social Security
and my pension?
• Will I need that additional income only for myself or for myself and someone else?
• How long can I leave my money in the annuity?
• When will I need income payments?
• Does the annuity let me get money when I need it?
• Do I want a fixed annuity with a guaranteed interest rate and little or no risk of losing the
principal?
• Do I want a variable annuity with the potential for higher earnings that aren’t guaranteed
and the possibility that I may risk losing principal?
• Or, am I somewhere in between and willing to take some risks with an equity-indexed
annuity?
What Questions Should I Ask My Agent or the Company?
• Is this a single premium or multiple premium contract?
• Is this an equity-indexed annuity?
• What is the initial interest rate and how long is it
guaranteed?
• Does the initial rate include a bonus rate and how
much is the bonus?
• What is the guaranteed minimum interest rate?
• What renewal rate is the company crediting on annuity
contracts of the same type that were issued last year?
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Fixed Deferred Annuities
What is a “Free Look” Provision?
Fixed Deferred Annuities
Buyer’s Guide to Fixed Deferred Annuities
• Are there withdrawal or surrender charges or penalties if I want to end my
contract early and take out all of my money? How much are they?
• Can I get a partial withdrawal without paying surrender or other charges or losing
interest?
• Does my annuity waive withdrawal charges for reasons such as death, confinement in
a nursing home or terminal illness?
• Is there a market value adjustment (MVA) provision in my annuity?
• What other charges, if any, may be deducted from my premium or contract value?
• If I pick a shorter or longer payout period or surrender the annuity, will the accumulated
value or the way interest is credited change?
• Is there a death benefit? How is it set? Can it change?
• What income payment options can I choose? Once I choose a payment option, can I
change it?
Final Points to Consider
Before you decide to buy an annuity, you should review the contract. Terms and conditions
of each annuity contract will vary.
Ask yourself if, depending on your needs or age, this annuity is right for you. Taking money
out of an annuity may mean you must pay taxes. Also, while it’s sometimes possible to
transfer the value of an older annuity into a new annuity, the new annuity may have a new
schedule of charges that could mean new expenses you must pay directly or indirectly.
You should understand the long-term nature of your purchase. Be sure you plan to keep an
annuity long enough so that the charges don’t take too much of the money you put in. Be sure
you understand the effect of all charges.
If you’re buying an annuity to fund an IRA or other tax-deferred retirement program, be sure
that you’re eligible. Also, ask if there are any restrictions connected with the program.
Remember that the quality of service that you can expect from the company and the agent is
a very important factor in your decision.
When you receive your annuity contract, READ IT CAREFULLY! Ask the agent and company for
an explanation of anything you don’t understand. Do this before any free look period ends.
Compare information for similar contracts from several companies. Comparing products may
help you make a better decision.
If you have a specific question or can’t get answers you need from the agent or company,
contact your state insurance department.
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© 1999, 2007 National Association of Insurance Commissioners
National Association of Insurance Commissioners
2301 McGee St
Suite 800
Kansas City, MO 64108-2604
(816) 842-3600
© 1999, 2007 National Association of Insurance Commissioners
Buyer’s Guide to:
Fixed Deferred
Annuities